Hedge funds are making a run for safety, says Goldman

Hedge funds are turning increasingly defensive as uncertainty around geopolitics and the path of interest rates, as well as the stock market’s April swoon, has investing pros spooked.

Positioning data shows that hedge fund added defensive equity positions to their portfolio in April at the fastest pace in eight months, while still being net sellers of global stocks, according to figures compiled by Goldman Sachs Group Inc.’s prime brokerage desk. That snaps a four-month streak of buying. Health care saw the biggest inflows, while consumer discretionary stocks had the largest net selling in seven months, according Goldman’s data.

“It makes sense that hedge funds would be more defensive,” said Keith Lerner, co-chief investment officer at Truist Wealth. “You had a big first quarter, and now we’re seeing more choppiness and volatility around interest rates and inflation.”

The move came as US stocks made a sharp reversal, with a strong first quarter giving way to an awful April. Concerns about the US economy, consumer sentiment, stubborn inflation and cautious guidance from Corporate America are all weighing on investors.

Defensive sectors have been the worst performers in the S&P 500 over the last 12 months, with utilities, consumer staples and health care stocks among the equity benchmark’s biggest laggards. But with the Federal Reserve seemingly likely to keep interest rates higher for longer, the worst performing equity sectors can be the biggest beneficiaries, according to data tracked by Evercore ISI going back to the 1970s.

Big bets on US health care stocks can be explained by the group’s lack of cyclicality, with investors potentially be seeking a shelter from volatility, said Aaron Dunn, co-head of value equity and portfolio manager at Morgan Stanley Investment Management. Goldman’s data shows that pharmaceuticals, biotech and health care equipment and supplies saw the most buying in April.

Plus, with the S&P 500 Health Care Index trading at 18.6 times projected forward 12-month earnings, versus 27.6 times for information technology, the stocks are comparatively cheap. Those valuations should help encourage a rotation from big-cap tech stocks to value shares because it “builds some defense and diversification in portfolios,” said Vineer Bhansali, chief investment officer at Longtail Alpha LLC.